Anchors Aweigh: What does Gold mean in the Age of Bitcoin?
How different is a Bitcoin standard from the reality of the historical gold standard?
In a recent conversation with a well-respected businessman at The Foreign Correspondents' Club of Japan I shared my zeal for Bitcoin and he provided some thoughts on the nature of commodity money:
“Cody, the world has sought a uniform, invariant, incorruptible (conveniently exchangeable) medium of value forever. Perhaps Bitcoin is the answer, and perhaps this will come about in the Trump administration. Or, perhaps not.”
He went on to share with me two interesting papers: Anchors Aweigh: The Transition from Commodity Money to Fiat Money in Western Economies, a 1993 paper from The Canadian Journal of Economics by Prof. Angela Redish that is a classic provocation about the true nature of commodity money vs the myth, as well as Central Bank Digital Currencies: An Old Tale with a New Chapter by Michael D. Bordo and William Roberds (2022).
I found that Prof. Angela Redish's argument presented an interesting critique of the popular image of the historical gold standard and in this commentary I reflect on gold commodity money and what it means for understanding Bitcoin.
The Allure of Aurum
Gold and silver have been at the base of monetary systems for a thousand years. Admittedly I harbour some romanticised ideas of the Classical Gold Standard in particular (1873 - 1914). This was the era when my own country of New Zealand was built, when railways and steam engines and progress seemed to enter all new highs. From the first aircraft to the invention of synthetic fertiliser to machine guns, it all happened and man conquered the corners of the world in the late nineteenth century under the auspices of empire and hard money (even if the New Zealand Pound was not itself directly pegged to gold but instead anchored via the British Pound).
The several hundred years prior to that compress down into a popular imagining of a golden past, from the beauty of Venice’s architecture to the economic power and wealth of Florence and the Italian Banking states through to the Enlightenment and the British Empire.
From Da Vinci to Newton: progress and beauty seemed to be powered by “hard money”.
My own exposure to these histories comes predominantly from Bitcoin and Bitcoin-adjacent sources, whether it is Layered Money by Nik Bhatia, or Broken Money by Lyn Alden, as well as the older Austrian studies by Hayek or L.V. Mises on money and banking. Even in Marx’s Capital Volume One a significant amount of time is spent discussing the nature of gold and money.
However Redish proposes a narrative that is interesting: that the transition from gold-backed commodity money to fiat money in the 1970s was a less dramatic change than appears at first glance and that perhaps there never really was much of a distinction between fiat monies and the so-called gold standard.
WTF Happened in 1971
WTF Happened in 1971 has become a cultural meme. Everything seemed to fall apart right from the moment when President Nixon famously closed that gold conversion window and the French navy were quietly on the way to New York to “collect the gold”.
It is telling at a glance: the end of this period coincided with the last men to step foot on the moon, the apparent peak of relative living standards of post-war America, the white picket fences and single-earner household abundance of many western countries, of a global sense of order ordained under the Bretton Woods system.
Immediately following this there was a period of massive inflation, a global downturn, and a cultural reaction that is probably hard to honestly quantify but in aggregate seemed to turn the lightness of The Andy Griffith Show into the dark macabre of Taxi Driver in just 10 years.
Redish’s model of a commodity gold money resembles a ship’s anchor, with differing lengths of chain connecting the base reality gold with the day to day monetary instruments managed by institutions, with differing degrees of slack. The anchor in some form was necessary for underwriting the trust needed for money to be accepted “No questions asked”, but eventually it became a literal burden:
“My view of the collapse of Bretton Woods is the story of a ship on a finite anchor chain, in rising seas: At some point one has to cut the chain to save the ship. I will argue that the seas had been rising not just in the Bretton Woods period, but for many decades previously - and indeed were the motivating force for changes in monetary institutions through the nineteenth and early twentieth centuries” (pp 778)
The Bitcoiners and the gold bugs point to 1971 as a major kind of fiat inflection point and the beginning of a new trajectory, but was it a case that it really was a massive shift in policy? Or was it the final unwinding of the last remnants of defunct commodity money that had been happening throughout the century?
Redish’s view seems to be that by 1971 this “fixed chain” could not be spooled out anymore and needed to be “cut” loose lest the ship sunk. Could things have been a lot worse if obstinate officials tried to hold onto it for longer?
Trust in the Anchor
In Redish’s work and the work of Bhatia and others, the key word that stands out to me in the period of 15th - 19th century is “fiduciary”, another way of saying “trust”.
I am struck by the degree of manoeuvring, compromise, and politicking that was involved in the formation and chartering of various banks, whether the early Bank of Amsterdam, the Bank of England, or the various experiments along the way.
Even the fabled gold Florin relied on the discipline and trust of authorities not to debase. The hard reality of gold ostensibly kept some sense of bounds as to what could be done with money, but there was no physical mechanism enforcing this, only policy.
Normal people (then as now) were far too busy with their daily lives to notice or protest a minor debasement, though they may push back against a major one, or get swept up in the fever of war and even embrace debasement as somehow necessary.
Broadly I am struck by the idea that there was always institutional involvement in defining and guiding money. With Kings and Empires and city states money was still minted by the sovereign or the authority with its actual face value defined by the stamping of the crown on the coin (separate to the precious metal content).
As Redish writes: “Textbook versions of a commodity money system model a world in which both the medium of exchange and the unit of account are (for example) lumps of gold … In practice, such a monetary system is a fiction, and commodity money standards in even medieval Europe differed from it in an important way: coins were not traded by weight, not even directly by tale, but by their value in a unit of account, which differed from the medium of exchange.” (pp 779)
In other words, the commodity money base imbued some degree of trust, a kind of brand “as good as gold”, but it was not absolute nor atomic. The exact gold content did not play as much of a role as we might imagine. The value was still by decree and perhaps more rough and opaque than imagined.
The anchor chain was let out slowly over time, sometimes temporarily let out quicker in times of war, other times held taut in strong currents, but always there it remained as a useful cultural reminder.
The Gold Bullion Famine of the 1460s (not enough gold) and the influx of gold and silver during the conquests of the New World (too much gold), are two examples of major changes to the actual base commodity metal that could have challenged the trust in the entire system by shifting the underlying anchor of gold. But even if there was political and social pressure to respond, a revolt is not binary and along the way the authorities and institutions were able to innovate and reconfigure things to an acceptable level.
People shrugged it off, got on with things, dealt with it. Money was money it seemed, and even if the underlying gold had been changed or messed with they had no real agency anyway.
“Under commodity standards - in practice - the anchor was put in place not by fundamental natural forces but by decisions of human monetary authorities.” (pp 778)
Overall it seems to me like the history of money involved a delicate kind of dance where a debasement in times of wealth to pay for a war were not equal to debasement in times of famine by the same government, which was different again to inflation or deflation from a change to the actual circulating volume of gold bullion.
Money then seems to become a political question. How much shenanigans would a population put up with? Do they trust the state? What is the appetite for debasement and volatility vs stability? What can “normal people” even do about it if they are not happy?
How about the Austrians?
There is a logic to Austrian economics which makes sense and is intuitive. Austrian thought is embraced wholeheartedly in Bitcoin, but how relevant are Austrian theories on money in the age of Bitcoin?
Is it possible that the vast bulk of Austrian monetary critique is pegged to a certain worldview from the mid to late late 19th century in a moment of relative stability as to the form of the classical gold standard?
There is a strong focus on Bitcoin's fixed supply, that there will only be 21 million Bitcoins. But how does this sit with the historical challenges of a fixed base money? The history of gold shortages or new discoveries of gold had a pronounced impact on the economy. This was not "money printing" as such, but a direct and unplanned change to base money. The gold bullion famine mentioned earlier is one example of this. It sounds strange, that there was a recession because there was “not enough money”, but that seemed to be the factor at play. Similarly, the inflows of new gold from the Americas also had an impact.
The Austrians knew about this issue with a strict fixed supply and might argue that an elastic credit money on top of a fixed base money is needed. These kinds of credit "super structures" evolved as new kinds of institutions and innovations in paper money came along.
I have become very interested in this topic and discussed it with Hubertus Hofkirchner along with his work on the Bitcredit protocol.
Relying on pure specie dug from the ground is not how modern economies develop, and I wonder if the innovations of Bills of Exchange, and other kinds of trustful paper in the middle ages onwards (enabling elastic credit and the lengthening of supply chains) was arguably a precondition to the renaissance and eventual industrial revolution?
But Bitcoin is not gold. This is all a roundabout way of asking, are our familiar stories of Austrian theories of money, of gold bullion, of Hayek and L.V. Mises' take on commodity money permanently wedded to the past and to the age of gold? Are there useful aspects to learn from, but other aspects that have been superseded by what is possible with Bitcoin? What even is the role of credit money in Bitcoin? Who issues such credit? How do these different forms of "money" interact?
And what of Bitcoin?
The Bitcoin whitepaper is unequivocal that removing the need for trust is essential in money. Once and for all. There is no longer decree, there is no longer a central authority.
A strong sense of cypherpunk and libertarian ethos has imbued a certain trajectory in Bitcoin as a kind of Resistance Money that lives outside of the purview of the state.
Value is subjective in the individual and so there is necessarily a degree of trust required in Bitcoin for the individual to value it as money. This is not an instant phenomenon.
Interestingly Bitcoin takes on this trust for the individual in two ways: Firstly because it is "trustless" it does not require a third party to "trust" (Bitcoin is auditable and transparent), but as part of that it also endears absolute trust in its value because of the one-way expenditure of electricity to back and secure the system.
Unlike gold, which has a commodity value (its weight) and a decreed face value (the unit of account), Bitcoin is always one and the same: 1 BTC = 1 BTC.
Of course there are more trustful aspects emerging in the higher layers of Bitcoin, whether it is custodial exchanges and Lightning custodians, ecash mints, etc, but at the end of the day there are enough ride-or-die Bitcoiners who run nodes, challenge everything anybody ever said and have UTXOs that only they have the keys to that gives a strong social consensus to what Bitcoin is: that Bitcoin can be trusted to be trustless.
Bitcoin is not yet another pivot of the legacy system into a new format but something entirely different. The special attributes of Bitcoin with its auditable base layer that can be quickly settled and easily verified presents a unique and wholly new configuration that is not just another permutation of “Paper” lengthening the anchor to reality.
The Bitcoin Revolution
Are the classic models of gold money, gold standards, and commodity theories of money and the like not as useful as we once thought?
Is Bitcoin its own beast entirely? Are we best to pick and choose from the thoughts of Ricardo, Menger, Hayak and the others without being tied to their every word?
Maybe there is something comforting in the idea that a future state of “Bitcoin Standard” would somehow mirror a fabled historical golden era, where we return to Golden Venice, Vienna, and Florence again (see Bitcoin is Venice).
But what if it is not like that? What if Bitcoin changes and emerges in ways that we cannot predict because it has simply never happened before?
Of course I am not waiting on the sidelines, my lot is clearly and absolutely with the Bitcoiners, but it is interesting food for thought and exciting to me creatively and philosophy!
Bitcoin does not exist in a vacuum. It has monetised precisely because it is global and accessible to everyone, everywhere. Maybe there are aspects of the golden past that return, just as the renaissance reintegrated the classics of the Roman and Greeks but through a new lens.
Does the new Bitcoin monetary system inherit the skin and accent of the old one? In some perversion do US Dollars simply become “Bitcoins” in everything but name? Is Bitcoin the new anchor that the United States needs to resolve its deep fiscal issues?
Or is there a dance of jubilation and all fiat monies capitulate in a great emancipation? How does an unchangeable protocol spread through the malleable terrain of human consciousness?
A Self-Sovereign Model
What do the unique factors of nearly instant settlement, of digital absolutely verifiability, of a relatively hidden class of holders who are geographically distributed mean?
Is there a broader political and social consideration that rests not so much on what Bitcoin is in itself, but about what the world has become?
I still think one of the best works exploring this is The Sovereign Individual by Rees-Mogg and Davidson which has perhaps the best approximation of what I can see as a changing world order, an order in which Bitcoin may emerge at the same time as a massive disruption in the nature of work, nation state power, and relations between people.
“By the late twentieth century there was no way to lengthen the chain further, and monetary authorities chose to abandon the anchor. At the time, the benefits from seigniorage and from the freedom to use monetary policy for stabilization purposes made losing the anchor a small cost. Now, as the inconsistency between discretionary monetary policy and 'anchoring' the money stock has become apparent, monetary authorities are searching for a new anchor: investing in reputations for low inflation; determining the optimal degree of independence for a central bank; choosing to form a currency union.” (pp 791)
Maybe the anchor has been cut entirely but the ship of fiat is still sinking.
What if Bitcoin is the fabled life raft after all?
What do you think?
What you think? Is there nuance or other things to consider in the conversation about how money works? Reach out and let me know what you think.
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